MARKET UPDATE | 17 MARCH 2023
If you can keep your head when all about you are losing theirs…
Having recently been testing new highs in some areas, markets have been rattled once again in the past week by banking issues in the US and Europe, raising renewed questions about contagion risks within the global financial system.
At times like this it is important to ‘keep your head’ – that is exactly what Bordier UK’s Investment Committee is doing. The experienced team has seen many market cycles and events, including the global financial crisis (‘GFC’) of 2008, so we understand many of the current issues being experienced in the US by the likes of Silicon Valley Bank (‘SVB’) and in Europe by Credit Suisse. We believe the issues are very different to the GFC and that the potential for a systemic banking crisis is minimal. However, in the near term confidence in the financial system has been shaken by these two, quite independent, events. The US issues principally
stem from the rapid rise in interest rates and need for liquidity from cash-strapped technology start-ups; Credit Suisse’s corporate woes have been rumbling for some time, but were not helped when its auditor announced this week that it had identified ‘material weaknesses’ in its financial controls.
Whilst many lessons were learned in the GFC, it seems that some were not. But it is important to stress that globally, banks are now fundamentally much more resilient than they were in the build up to the GFC. Balance sheets have been strengthened significantly, as have both regulations and lending criteria. It is also worth adding that, Credit Suisse’s issues aside, Swiss banks are generally very conservatively run with strong balance sheets and enhanced regulatory oversight. Bordier & Cie’s liquidity and capital ratios, for example, are significantly above regulatory requirements and stronger than many of its peers, a reflection of the financial disciplines that have been adhered to over almost 180 years.
“…it is reassuring to see central banks in the US, UK, Europe and Switzerland sending out a united ‘message’…”
What is clear is that central banks and regulators are reacting quickly and robustly to calm even the impression of any lack of confidence in the financial system – they are acting in a way that rapidly sures up confidence and this can be seen in more settled market conditions yesterday than earlier in the week. It will take time for full confidence to return, but it is reassuring to see central banks in the US, UK, Europe and Switzerland sending out a united ‘message’ that such problems will be contained locally and not allowed to grow into a systemic global risk. It is possible that in the long run this may even be a positive for global markets, as off the back of current nervousness central banks may not feel the need to raise interest rates as much as previously thought or needed, and may even pause for breath, potentially creating a springboard for a more positive market backdrop.
“….it is in market conditions such as these that future opportunities can be found…”
We remain close to our underlying fund managers and whilst we do have exposure to financial companies, including banks (but not SVB), the overwhelming sentiment is that cool, calm heads should prevail. Managers are looking through the current issues and instead of being driven by sentiment are analysing the fundamentals of the financial (and other) securities they own to ensure these have the resilience to get through the current uncertain period and continue to drive returns for investors. Whilst it may currently be uncomfortable, it is in market conditions such as these that future opportunities can be found; several underlying managers we have spoken to are selectively taking advantage of the current weakness with a view to maximising future returns.
We invest for the medium to long term and currently see no need to alter our existing positioning during this period of heightened market volatility. We are, however, keeping close to events and will make changes, as necessary, if we consider the outlook to have fundamentally altered and where it is in clients’ best interests to do so.
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Bordier UK is a specialist investment manager dedicated to providing portfolio management services. We offer Restricted advice as defined by the FCA, which means that if we make a personal recommendation of an investment solution to you, it will be from Bordier UK’s range of investment propositions and will reflect your needs and your approach to risk.
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